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other things, such regulations will prevent unreasonable accumulations of assets in the REMIC, and require the REMIC to report information adequate to allow residual holders to compute taxable income accurately (including reporting more frequently than annually). Further, such regulations may require reporting of OID accrual more frequently than otherwise required by the Act.

Treasury study

The Congress was concerned about the impact of the REMIC provisions upon the thrift industry. Accordingly, the Act requests that the Treasury Department conduct a study of the effectiveness of the REMIC provisions in enhancing the efficiency of the secondary market in mortgages, and the impact of these provisions upon thrift institutions.

Taxable mortgage pools

The Congress intended that REMICS are to be the exclusive means of issuing multiple class real estate mortgage-backed securities without the imposition of two levels of taxation. Thus, the Act provides that a "taxable mortgage pool" ("TMP") is treated as a taxable corporation that is not an includible corporation for purposes of filing consolidated returns.

Under the Act, a TMP is any entity other than a REMIC if (1) substantially all of the assets of the entity consist of debt obligations (or interests in debt obligations) and more than 50 percent of such obligations (or interests) consist of real estate mortgages, (2) such entity is the obligor under debt obligations with two or more maturities,95 and (3) under the terms of such debt obligations on which the entity is the obligor, payment on such debt obligations bear a relationship to payments on the debt obligations (or interests therein) held by the entity.96

Under the Act, any portion of an entity that meets the definition of a TMP is treated as a TMP. For example, if an entity segregates mortgages in some fashion and issues debt obligations in two or more maturities, which maturities depend upon the timing of payments on the mortgages, then the mortgages and the debt would be treated as a TMP, and hence as a separate corporation. The TMP provisions are intended to apply to any arrangement under which mortgages are segregated from a debtor's business activities (if any) for the benefit of creditors whose loans are of varying maturities. The Act provides that no domestic building and loan association (or portion thereof) is to be treated as a TMP.

Special rule for REITs

The Congress intended that an entity that otherwise would be treated as a TMP may, if it otherwise meets applicable requirements, elect to be treated as a REIT. If so, the Act provides that

95 For this purpose, the Congress intended that debt instruments that may have the same stated maturity but different rights relating to acceleration of that maturity, are to be treated as having different maturities. In addition, the Act provides that to the extent provided in Treasury regulations, equity interests of varying classes that correspond to differing maturity classes of debt are to be treated as debt for these purposes.

**For example, certain arrangements that are commonly known as "Owners' Trusts" would be treated as TMPs under the Act.

under Treasury regulations, a portion of the REIT's income would be treated in the same manner as income subject to the special rules provided for a portion of the income of a residual interest in a REMIC. The Congress intended that this calculation is to be made as if the equity interests in the REIT were the residual interest in a REMIC and such interests were issued (i.e., the issue price of interests is determined) as of the time that the REIT becomes a TMP.97

The Congress intended that the Treasury regulations would provide that dividends paid to the shareholders of a REIT would be subject to the same rules provided for a portion of the income of holders of residual interests in a REMIC. Thus, for example, the Congress intended that the Treasury regulations would provide that to the extent that dividends from the REIT exceed the daily accruals for the REIT (determined in the same manner as if the REIT were a REMIC) such dividends (1) may not be offset by net operating losses (except those of certain thrift institutions98), (2) are treated as unrelated business income for certain tax-exempt institutions, and (3) are not eligible for any reduction in the rate of withholding when paid to foreign persons. The Congress also intended that the Treasury regulations would require a REIT to report such amounts to its shareholders.99

Effective Date

The provisions of the Act are effective with respect to taxable years beginning after December 31, 1986.100 The amendments made by the Act to the OID rules apply to debt instruments issued after December 31, 1986. The provisions relating to taxable mortgage pools do not apply to any entity in existence on December 31, 1991, unless there is a substantial transfer of cash or property to such entity (other than in payment of obligations held by the entity) after such date. For purposes of applying the wash sale rules provided by the Act, however, the definition of a TMP is applicable to any interest in any entity in existence on or after January 1, 1987.

Revenue Effect

The provisions are estimated to decrease fiscal budget receipts by $5 million in 1987, $17 million in 1988, $36 million in 1989, $59 million in 1990, and $79 million in 1991.

97 If a portion of a REIT is treated as a TMP, such portion may qualify as a REIT subsidiary (see sec. 662 of the Act).

98 But see section 860E(a)(2).

99 If the REIT has a REIT subsidiary that is a TMP, then the Congress intended that the portion of the REIT's income that is subject to the special rules is determined based on calculations made at the level of the REIT subsidiary.

100 The Congress intended that in the case of REMICS issued after December 31, 1986, such REMICS and the holders of interests therein would be governed by the provisions of the Act regardless of the taxable years of the holders.

TITLE VII-MINIMUM TAX PROVISIONS

Minimum Tax on Corporations and Individuals (Secs. 701-702 of the Act and secs. 53 and 55-59 of the Code)1

Corporate minimum tax

Prior Law

Under prior law, corporations paid a minimum tax on certain tax preferences. The tax was in addition to the corporation's regular tax. The amount of the minimum tax was 15 percent of the corporation's tax preferences, to the extent that the aggregate amount of these preferences exceeded the greater of the regular income tax paid or $10,000 (Code sec. 56).

Tax preference items

The tax preference items included in the base for the minimum tax for corporations were:

(1) For real property, the excess of accelerated over straight-line depreciation, applying the useful life or recovery period prescribed for regular tax purposes (in the case of property eligible for ACRS, 19 years);

(2) For certified pollution control facilities, the excess of 60month amortization over the amount of depreciation otherwise allowable;

(3) In the case of certain financial institutions, the excess of the bad debt deductions over the amount of those deductions computed on the basis of actual experience;

(4) Percentage depletion to the extent in excess of the adjusted basis of the property; and

(5) 18/46 of the corporation's net capital gain.

For personal holding companies, accelerated depreciation on leased personal property, mining exploration and development costs, circulation expenditures, research and experimental expenditures, and excess intangible drilling costs were also preferences.

When a corporation had a regular tax net operating loss attributable to minimum tax preference items in excess of $10,000, no immediate add-on minimum tax liability was incurred with respect to those preference items. Minimum tax liability was incurred with respect to those preference items when the "preferential" portion of the net operating loss was used to offset regular taxable income, treating this portion as used only after nonpreferential net operating losses had been exhausted.

1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 501; H.Rep. 99-426, pp. 302-328; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 1101; S.Rep. 99-313, pp. 515-540; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 250-284 (Conference Report).

Cutback in certain preferences

In addition to imposing an add-on minimum tax, prior law (sec. 291) imposed a cutback in the use of certain corporate tax preferences for regular tax purposes. Adjustments were made to the corporate minimum tax to prevent the combination of that tax and the cutback provision from unduly reducing the tax benefit from a preference. The cutback applied, with differing percentage reductions, to the following items: (1) certain excess depletion for coal and iron ore, (2) the portion of bad debt reserves deducted by financial institutions that exceeded deductions allowable under the experience method, (3) certain interest deductions of financial institutions that were allocable to purchasing or holding certain taxexempt obligations, (4) a foreign sales corporation's (FSC) exempt foreign trade income, (5) the reduction of recapture, under section 1250, for depreciation deductions relating to real estate, (6) for pollution control facilities, the excess of the amortization deductions allowed over the depreciation deductions that would otherwise apply, (7) intangible drilling cost deductions of integrated oil companies, and (8) the expensing of mineral exploration and development costs.

Individual minimum tax

Under prior law, individuals were subject to an alternative minimum tax which was payable, in addition to all other tax liabilities, to the extent that it exceeded the individual's regular tax owed.2 The tax was imposed at a flat rate of 20 percent on alternative minimum taxable income in excess of the exemption amount. However, the amount so determined was reduced by the foreign tax credit and the refundable credits.

Alternative minimum taxable income generally was equal to regular tax adjusted gross income, as increased by certain tax preferences and decreased by the alternative tax itemized deductions. The exemption amount, which was subtracted from alternative minimum taxable income before applying the 20 percent rate, was $40,000 for joint returns, $20,000 for married individuals filing separately, and $30,000 for single returns.

Tax preference items

The tax preference items that were added to the adjusted gross income base for purposes of the alternative minimum tax on individuals were:

(1) Dividends excluded from gross income under section 116, which permitted individuals to exclude dividends received in an amount not to exceed $100 ($200 for a joint return);

(2) For real property, the excess of accelerated over straight-line depreciation, applying the useful life or recovery period prescribed for regular tax purposes (in the case of property eligible for ACRS, 19 years);

2 A taxpayer's regular tax meant the taxes imposed by chapter 1 of the Code (other than the alternative minimum tax, the investment credit recapture tax (sec. 47), the taxes applicable in some instances for annuities (sec. 72(m)(5)(B) and 72(q)), lump sum distributions from qualified pension plans (sec. 402(e)), individual retirement accounts (sec. 408(f)), and certain trust distributions (sec. 667(b)), reduced by all nonrefundable credits including the foreign tax credit.

(3) For leased personal property, the excess of accelerated depreciation over depreciation calculated under the straight-line method, with the latter being determined, in the case of property eligible for ACRS, by applying useful lives or recovery periods of five years for three-year property, eight years for five-year property, 15 years for 10-year property, and 22 years for 15-year public utility property;

(4) For certified pollution control facilities, the excess of 60month amortization over the amount of depreciation otherwise allowable:

(5) For mining exploration and development costs (other than those relating to an oil or gas well) that were expensed, the excess of the deduction claimed over that allowable if the costs had been capitalized and amortized ratably over a 10-year period;

(6) For circulation expenditures (relating to newspapers, magazines and other periodicals) that were expensed, the excess of the deduction claimed over that allowable if the amounts had been capitalized and amortized ratably over a three-year period;

(7) For research and experimentation expenditures that were expensed, the excess of the deduction claimed over that allowable if the amounts had been capitalized and amortized ratably over a 10year period;

(8) Percentage depletion to the extent in excess of the adjusted basis of the property;

(9) For net capital gains, the portion (i.e., 60 percent) deducted from gross income under section 1202, except that gain from the sale or exchange of the taxpayer's principal residence was not taken into account;

(10) For incentive stock options, the excess of the fair market value received through the exercise of an option over the exercise price; and

(11) For intangible drilling costs (relating to oil, gas, and geothermal properties) that were expensed, the amount by which the excess portion of the deduction (i.e., the excess of the deduction claimed over that allowable if the costs had been capitalized and amortized ratably over a 10-year period) exceeded the amount of net oil and gas income.

For certain of these preferences, individuals could elect for regular tax purposes to take a deduction ratably over 10 years (three years in the case of circulation expenditures) and thereby to avoid treatment of the item subject to the election as a minimum tax preference. The preferences, in addition to circulation expenditures, with respect to which such an election could be made were research and experimental expenditures, intangible drilling and development costs, and mining exploration and development costs. In addition, the ACRS provisions themselves allowed certain similar elections. In general, a principal reason for making such an election was to preserve for later years the value of an otherwise preferential deduction that would not benefit the taxpayer in the year

* Moreover, in the case of intangible drilling costs, a taxpayer (other than a limited partner or a passive subchapter S shareholder) could elect to forego the expense deduction and claim fiveyear ACRS and the investment tax credit instead. A taxpayer making this election was not subject to the minimum tax on these items.

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